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Plus Eight Star: Asian Virtual Goods Market 5 billion USD

+8* – Plus Eight Star, a consultancy firm, has posted a well-reasoned guestimate of the size of the virtual goods market in China, Korea and Japan: 5 billion USD! Contrast this with our guestimate in 2007 that the global virtual goods market was worth 2.1 billion USD. Some other estimates and revenue figures can be found here.

Two completely peripheral issues I feel like commenting on in +8*’s excellent post:

1) +8* insists on using the term “digital goods” instead of “virtual goods”. In my opinion this is a bad idea, because the term digital goods is already reserved for another purpose: to describe any goods that are stored in an electronic format, such as music or movies. See e.g. Webopedia’s definition of digital goods (c.f. my discussion of “information goods” (aka digital goods) vs. virtual goods in this paper).

2) +8* has noticed how difficult it is to define virtual worlds, and also that virtual goods exist in services other than virtual worlds. I think the next logical step is to stop trying to frame the discussion in terms of virtual worlds, and to instead focus on virtual goods as the central concept, as e.g. VERN and Virtual Goods News are doing.

To me as a Korean, it seems that most of estimations on the size of Asian virtual goods have been to wild to be trusted. Especially, statistics on Chinese market is groundless due to lack of source and methodology.

At least in case of South Korea, two strategies can be used for more accurate estimation.

1) Unsanctioned (Secondary) market: By Korean accounting laws, all of firms that earn over 5 million USD (as of the average exchange ratio of 2008) yearly revenue have to report their financial results to the authority concerned. By this law, two big middlemen, ItemBay and ItemMania, which consists of around 88% of secondary transactions, have been reporting their financial data since around 2004. They may be the most qualified for estimating at hand.

2) Sanctioned market: As is well known, Korean service providers of online games are well defined by their business models. For example, NC Soft’s yearly revenue comes mostly from fix-fee based games, in contrast, Nexon has been profiting mostly from micro-payments. Revenue profiles of some representative companies based on micro-payments, can be used for more accurate estimation on sanctioned market.

For the idea of “digital goods vs. virtual goods” your point with music and movies is valid. The reason we think it is better to assimilate virtual goods to music rather than put them in a separate category is that… their nature is actually quite close to music and movies. We found there was a strong psychological resistance (mostly generational) with ideas such as “why would anybody pay for that?”, while when making a comparison with iTunes songs lead to a better understanding.

There are also practical reasons for this assimilation – One example is that in Cyworld in Korea, you can pay for background music with the same credits you use as buying avatar designs.

For the definition of virtual worlds, we found it was more related to social/game mechanics than to any technical view or business model. In a way, the term “virtual world” itself is a legacy of the early sci-fi literature around the topic (from the 80ss and 90’s). You could almost consider virtual worlds as a sub-genre of online games, or consider online games as the most popular sub-genre of virtual worlds🙂

I have not jumped onto the bandwagon of this separation either. While the division between virtual and digital goods might have some bearing in philosophical sense, it does not matter much at all in business domain.

By the way, digital goods are often referenced as virtual goods as well.🙂

Fairfield (2005) presented three defining attributes for virtual goods: rivalrousness, persistence, and interconnectedness. Rivalrousness refers to the scarce nature of virtual good, i.e. one good can only be used by a one person at a time, contrary to digital goods, which can be copied indefinitely. Persistence refers to virtual goods being persistent, i.e. existing for a periods of time without vanishing after e.g. a computer shutdown. Interconnectedness refers to virtual goods being interactive among multiple actors in a given context.

While these defining attributes illuminate the nature of virtual goods in practice and to some extent separate them from other digital goods, it is only the decision of the virtual world designers if these attributes apply. There exists only an artificial reason for virtual goods not being copyable. The scarcity or the rivalrous nature of virtual goods is implemented by at least two reasons: 1) it balances the economy of virtual world, 2) it maintains user’s incentive to buy virtual goods . In this respect rivalrousness is implemented for similar reason as in the music industry in forms of copy-protections.

Persistence is as well a design choice. In practice designing virtual goods not being persistent might not be wise, although there exists non-persistent items as well. In several virtual worlds there are items that have a very short lifespan for gameplay reasons.

Interconnectedness is parallel to Castronova’s (2001) defining factors of a virtual world, wherein actions inside the world must have causal relationships. Fairfield (2005) refers to virtual goods not being in isolation, but in interaction with the virtual world and its users. I argue that interconnectedness can not be as easily defined for virtual goods. For example, virtual good can exist in virtual world without users interacting with it or virtual world might have separate instances for individual users, where the owner is alone and therefore not able to interact with others.

The previous point is also connected to Benjamin’s point about separation between virtual worlds and online-games in above comment. It surely seems that virtual world and virtual goods are being approach with a certain degree of “scificism” and hype.